When a private company builds a city-owned entertainment venue on land it will later sell to the city, can materials the company donates to the city before installation be purchased tax-free?

Plain-English summary

A city decided its residents would benefit from a new entertainment facility for concerts, plays, musicals, and other cultural events, and wanted to own the venue itself. Because a private company ("Company A") already owned the land, the city and Company A structured a multi-step deal: Company A would build the facility (the "City Facility") under a Development Agreement, with the city participating in design approval and monitoring construction through its own construction consultant; the city would fund the project through debt proceeds; once construction finished, the city would buy the completed facility and underlying land from Company A using those dedicated funds; and the city would then lease the finished facility back to Company A for 21 years, with Company A operating and maintaining it.

Company A's separate construction contract with its Contractor built in a donation structure for certain materials (referred to as "AFFILIATE" in the redacted letter): Company A intended to donate these materials to the city before they were incorporated into the project or used, with title passing from Subcontractor to Contractor to Company A upon delivery to the jobsite — but before incorporation or use — and with a letter of intent from the city confirming its acceptance of the donation. The subcontracts down the chain mirrored this same separation, title-transfer, and donation structure.

Based on the facts and consistent with two earlier letter rulings on similar donation structures (document numbers 9806570L, dated June 9, 1998, and 9901207L, dated January 6, 1999), the Comptroller confirmed the arrangement meets the requirements for exemption under 34 TAC § 3.291(f) (development work) and Tax Code § 151.155(e) — so Company A could issue an exemption certificate to its Contractor for the donated materials purchased for donation to and acceptance by the city prior to incorporation or use.

What this means for you

Developers and contractors on public-private facility deals

Structuring donated materials with a genuinely separated contract — clear title transfer up the chain, donation and city acceptance before incorporation into the project, and documentation (like a letter of intent) confirming the city's acceptance — can preserve a sales tax exemption on those materials even though a private company is doing the actual construction and will lease the finished facility back.

Cities and public entities partnering with private developers

The exemption here rides on your entity's willingness to formally accept a donation of materials before they're built into the project. A letter of intent or similar documentation of your acceptance is part of what makes the structure work.

Accountants and tax professionals

This letter builds directly on two prior rulings (9806570L, 9901207L) applying the same donation-and-separation analysis — useful precedent to cite together when structuring similar public-facility development deals with donated construction materials.

Common questions

Q: Does the exemption require the materials to be donated before they're built into the project?
A: Yes. The letter's structure requires title to pass to the city, and the city to accept the donation, before the materials are incorporated into the project or otherwise used.

Q: Does it matter that Company A will lease the finished facility back and operate it?
A: Not for the material-donation exemption specifically — the ruling addresses only the donated materials, and the exemption follows the properly separated, documented donation structure regardless of the later leaseback.

Q: Can I use this exact same donation structure for my own public-facility project?
A: Not automatically. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own contract separation and donation documentation with a tax professional.

Citations and references

Rules, statutes, and prior letters:

• 34 Tex. Admin. Code § 3.291(f) (development work; separated contracts)
• Tex. Tax Code § 151.155(e) (exemption for property incorporated for an exempt entity)
• Prior Comptroller letter rulings 9806570L (June 9, 1998) and 9901207L (January 6, 1999)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200012946L

Original ruling text

December 15, 2000

Dear **:

Thank you for your letter requesting a written ruling on behalf of your client
("Company A") regarding the applicability of Texas sales and use taxes to the
transaction described below, which involves a project for a ** (the
"City"). This letter follows our recent telephone conversation regarding this
project. Your fact situation and question are restated below.

Fact Situation:

The City determined that its residents and residents of adjacent areas would
receive substantial benefit from an entertainment facility that would provide a
venue for concerts, plays, musicals and other cultural events, and decided to
provide and own such a venue (the "City Facility"). In order to provide for
construction of the City Facility, the City will enter into a Development
Agreement with Company A, which presently owns the land on which the City
Facility will be built.

The City has participated in the design of the City Facility, has approved the
plans, specifications and budget for the City Facility and will monitor the
construction through its construction consultant. The City will issue debt
and, at the time of the First Closing, deposit the portion of the debt proceeds
in excess of issuance costs and other City costs related to the project into a
fund dedicated to the project. Upon completion of the City Facility, the
Second Closing will occur and the City will utilize the dedicated fund to
acquire the City Facility, including the underlying land, from Company A, which
is required to use the amount received from the City to repay a portion of the
construction loan for the City Facility.

In order to facilitate operation of the City Facility for the use and benefit
of the public, the City will lease the City Facility to Company A for a 21-year
term, and Company A will be responsible for operation and maintenance of the
City Facility during the 21-year term.

Company A has entered into a separated construction contract with Contractor
that provides the following:

(1) Company A intends to donate AFFILIATE to the City prior to incorporation
or use; and

(2) title to the donated AFFILIATE shall transfer from Subcontractor to
Contractor and from Contractor to Company A upon delivery to the jobsite and
prior to incorporation or use by Subcontractor, Contractor and Company A.

Company A also will provide the contractor with a letter of intent or other
document from the City stating its intent to accept the donated AFFILIATE. In
addition, the contractor's subcontracts similarly will be separated contracts
for sales tax purposes and contain separation, title transfer and donation
provisions that are consistent with the provisions described above.

Based on our telephone conversation and the rationale of letter rulings dated
June 9, 1998 and January 6, 1999 ( document numbers 9806570L and
9901207L), it is our understanding that the donated AFFILIATE will be exempt
from sales and use taxes.

Ruling Request

We respectfully request that your office issue a written ruling confirming our
understanding of the Texas sales tax ramifications described above. Should you
determine that the Texas sales tax ramifications are different from those
described above, we request an opportunity to discuss this matter with you
prior to issuance of your written ruling.

Response: Based on the facts provided, the agreement between City and Company
A concerning the construction of the City Facility meets the requirements for
exemption as set out in Rule 3.291(f) concerning development work and Texas Tax
Code section 151.155(e). Therefore, Company A may issue an exemption
certificate to Contractor for AFFILIATE purchased that will be donated and
accepted by City prior to incorporation or use by Company A or by Contractor.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, you may e-mail our tax help section at .
You may also call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Gilbert Zamora
Tax Policy Division